Hayes testifies to Ways and Means Subcommittee on Trade

On June 11, Dermot Hayes was invited to testify before the House Ways and Means Subcommittee on Trade about the benefits of expanding agricultural trade. During his testimony, Hayes said the current Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership would both have a large, positive impact on US agriculture. Hayes said the negotiations for the Trans-Pacific Partnership had been going well, until Japan “hijacked” the negotiations. The entire transcript of his testimony is included below. A summary of the testimony can be read here.

Testimony to the Ways and Means Sub-Committee Hearing on Agricultural Trade

June 11th 2014

Dermot Hayes

Professor of Economics and Finance

Pioneer Chain of Agribusiness

Iowa State University

Chairman Nunes, Ranking member Rangel, and members of the sub-committee: Thank you for the opportunity to speak on agricultural trade. Thank you also for focusing on this issue at such a critical time. The US is currently negotiating free trade deals with countries across the Pacific and with the EU. These negotiations, if successful, will have a profoundly positive impact on US agriculture.

The most rewarding part of my job is teaching economics 101 to incoming students. In the very first class, I contrive to get two copies of my text book into the hands of one student and I then find a student who has yet to purchase the text. The students in class quickly realize that the second copy is worth almost nothing to the first student and they know that it is worth $100 to the second student. I then ask the two students to trade. The book typically changes hands for $50, leaving both students better off by $50. This $100 in wealth is created simply by moving the text from a student who places a low value on it to one who values it highly.

The step from the text book example described above to international trade is straightforward. The US has an abundance of land, capital, and skilled labor and will typically benefit from exporting products that require large amounts of these inputs. Corn, wheat, barley, and soybeans require large amounts of land relative to other inputs, and therefore, the US is a natural exporter of these commodities along with derived products such as beef, pork, poultry, dairy products, and eggs.

Most agricultural trade barriers are used against value added agricultural imports. Countries typically allow free access to feed-grains and other raw materials so that their domestic livestock industries can grow. In the absence of these barriers, transportation economies would favor the export of value added products. Therefore, any liberalization of agricultural trade will involve an increase in meat, poultry, dairy, and possibly fish, production in the US.

As I am sure you all know, many rural areas have been losing population as technologies have allowed farmers to increase the number of crop acres they cultivate. A dramatic increase in value added agricultural production, such as would occur if current negotiations are successful, will allow a repopulation of rural areas.

At this time I will offer some comments on the TPP and T-TIP negotiations.

TPP

Prior to the entrance of Japan, the focus of the TPP negotiations was to eliminate all duties and other non-tariff barriers. Progress towards a high standard free trade deal was surprisingly successful. Unfortunately, Japan has recently hijacked the negotiations by insisting on permanent protection for its beef and pork, dairy, wheat, rice, and sugar sectors. It has announced its intention of using the money generated by these duties to subsidize the relevant sectors. For example, duties collected on imported US pork would be used to subsidize Japanese pork producers.

I sincerely hope that our negotiators will hold out for an agreement that results in eventual free trade in these products. I do so for the following reasons.

1. The benefits from trade described earlier come from the reallocation of resources. In attempting to protect these sectors and stop any reallocation of resources, Japan is fighting the fundamental economics from which benefits are derived. It is as if Japan is prepared to allow the two students described earlier to trade so long as one student ends up with two text books.

2. Japan has insisted on this outcome because of food security concerns. This logic is flawed because Japan imports all of its feed grains.

3. If Japan, gets away with distortion of this sort, then other nations such as China will expect a similar deal from the United States. I view this issue as the most significant trade issue facing US farmers.

TTIP and the Importance of Equivalence

As is true for TPP, I see enormous opportunity for US agriculture from T-TIP.

The US corn market is currently being disrupted by the refusal of Chinese quarantine agency to allow shipments of US corn and distillers grain into China because of the likelihood they would contain a genetically modified variety of corn called MIR 162. This problem would not exist if Chinese regulators recognized the US scientific-regulatory system as equivalent to the Chinese system. In order to reduce problems of this type the US has typically included equivalence in trade deals.

Equivalence works because scientists can eventually form a consensus on what is safe. The process breaks down if non-scientific arguments are introduced. The EU has allowed this to happen and has imposed bans on genetically modified crops and growth enhancers in livestock that scientists all over the world view as being perfectly safe. I realize that some consumers in the US oppose these technologies, but under the US system these consumers have a choice. The EU system eliminates this choice. It is as if the consumers who shop at Whole Foods had a veto power over the rest of society.

In a well-structured T-TIP agreement, the US and EU systems will be viewed as equivalent and EU consumers will have a choice among safe alternatives that they currently lack. Unless this deal results in regulatory equivalence, countries will be able to impose new subjective barriers to replace those that have been eliminated. With equivalence, the US will be able to avoid the type of trade disruption currently roiling the US corn market.

(Released June 2014)